Legal Corner: Income Taxes and Divorce

There’s an old Irish saying that goes, When mistrust comes in, love goes out. As with a marriage, the ability to trust a soon-to-be ex-spouse is very important, and suspicion can make a complex process like divorce even more complicated. When it comes time to file income taxes one last time before the dissolution of the marriage, the parties need to determine the best way to handle it.

“There are several tax issues that each spouse needs to consider,” says Richard Yawitz of Polsinelli Shughart. “One is filing status. Do they file ‘married/ filing jointly’ or ‘married/filing separately?’ Do they file as head of household? It could be that by filing jointly they will have lower rates and, as a result, will pay less tax to the IRS. There are just so many variables to look at. But if one spouse doesn’t trust the other spouse and what he or she is putting on the tax return, then that person may have to say, I don’t care about saving a couple of dollars. I’m not going to have that liability.”

Kirk Stange of Stange Law Firm agrees that spouses should proceed with care when filing. “Parties should seek out the advice of a certified pubic accountant before they make their ultimate decision,” Stange cautions. “I see a lot of divorces where there’s pressure put on one party by the other to file a joint return when maybe that’s not the best route. I recently had a case like this and the tax return was a gigantic issue. The CPA was jumping up and down saying, Kirk, your client can’t sign that joint return! There’s funny business on it, and I think it’s going to result in them being audited.”

As a means of protection, Jim Loranger of Spencer Fane Britt & Browne indicates that a Separate Tax Liability Election can be filed. “It essentially says that a party is only liable for deficiencies with respect to their own items,” Loranger explains. “So if the husband has a business and the wife doesn’t really know anything about it, she can file that statement to protect herself from any future liabilities in respect to that business. But on the other hand, if the spouse knows that the other spouse is doing something dodgy, that will not work as you cannot have actual knowledge that there are incorrect items on a return and file a Separate Tax Liability Election.”

Stange recalls cases when he has feared that his client’s spouse was not reporting all of their income. “Often times the husband doesn’t disclose all of his earnings and then gets the wife to sign the joint return with the spin that if they file jointly, they will save money,” he says. “By the wife signing that return, she affirms in essence the husband’s income. Say it’s a maintenance case, and the wife signs a return stating that the husband makes $50,000 a year. But he actually earns $100,000 a year—and she wants maintenance based on the higher figure. That’s the biggest con in filing jointly, and that’s when I get nervous for my clients.”

Yawitz also points out that if there are children involved and the parties are filing separately, it needs to be decided which spouse will get to claim them. “Typically, the primary custodial parent claims the child or children as their dependent(s),” he notes. “If the parents share custody, they could split the exemptions by one person filing one year and the other filing the next. Or if there are two children, they could each claim one child.”

And then there’s the issue of who gets the refund. “The spouses probably shouldn’t file jointly unless there is an agreement in advance as to how the refund will be allocated.” Loranger says. “The IRS will issue a check to the husband and wife, or a lot of times now, people file their returns and they get an electronic refund directed to a specific account. That’s just something that needs to be thought through.”

In cases when there isn’t a business involved or commissions to report, divorcing parties can find some normalcy in their final filing. “When both people have a normal job and get a W2 each year, those cases are pretty straightforward and the parties do benefit by filing together,” Stange explains. “But at the end of the day, a lot of spouses really don’t know what the other is doing. You would think there would be transparency, but when people are going through a divorce, there are all sorts of things going on.”